Dollar 5¢ too high, Reserve believes

THE Reserve Bank believes the Australian dollar is overvalued by about 5¢, but it is considered likely to leave interest rates on hold this month after better than expected news on business investment intentions.

The Bureau of Statistics survey showed mining investment slipped 2.9 per cent in the three months to December, manufacturing investment fell 2 per cent and investment by services firms 7.5 per cent.

When asked about their plans for the coming financial year mining firms were 12 per cent more downbeat than a year ago and manufacturing firms 23 per cent more negative. But services firms - regarded as the most responsive to interest rates - were 5 per cent more positive.

''Manufacturing is a disastrous story whichever way you look at it,'' said Westpac chief economist Bill Evans. ''The slide is the biggest we've ever seen. But planned investment by services companies is four times as big and is set to climb. These are companies putting in warehouses or showrooms.''

Mr Evans had been expecting an interest rate cut at the Reserve Bank board's next meeting on Tuesday.

But he now thinks there will not be one until June when the next set of investment figures is out.

Documents released through freedom-of-information laws on Thursday show the Reserve Bank believed the Australian dollar was about 7 per cent overvalued in December. At the time the Australian dollar was trading at US105¢, meaning the bank believed it should have been trading at 98¢.

The dollar slipped half a cent to 102.4¢ on the investment news before climbing back to 102.8¢ as traders shifted their focus from actual to expected investment.

This story Dollar 5¢ too high, Reserve believes first appeared on The Sydney Morning Herald.